Pinnacle West Capital Corporation (NYSE:PNW) Q1 2024 Earnings Call Transcript

Pinnacle West Capital Corporation (NYSE:PNW) Q1 2024 Earnings Call Transcript May 2, 2024

Pinnacle West Capital Corporation beats earnings expectations. Reported EPS is $0.15, expectations were $0.00723. PNW isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, everyone, and welcome to the Pinnacle West Capital Corporation 2024 First Quarter Earnings Conference Call. At this time all participants have been placed on a listen-only mode. And we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Amanda Ho. Ma’am, the floor is yours.

Amanda Ho: Thank you, Matthew. I would like to thank everyone for participating in this conference call and webcast to review our first quarter earnings, recent developments and operating performance. Our speakers today will be our Chairman and CEO, Jeff Guldner; and our CFO, Andrew Cooper. Ted Geisler, APS President; and Jacob Tetlow, EVP of Operations are also here with us. First, I need to cover a few details with you. The slides that we will be using are on our Investor Relations website, along with our earnings release and related information. Today’s comments and our slides contain forward-looking statements based on current expectations, and actual results may differ materially from expectations. Our first quarter 2024 Form 10-Q was filed this morning.

Please refer to that document for forward-looking statements, cautionary language as well as the risk factors and MD&A sections, which identify risks and uncertainties that could cause actual results to differ materially from those contained in our disclosures. A replay of this call will be available shortly on our website for the next 30 days. It will also be available by telephone through May 9, 2024. I will now turn the call over to Jeff.

Jeff Guldner : Thanks, Amanda, and thank you all for joining us today. 2024 started off in line with the financial guidance that we provided on the fourth quarter call in February. And before Andrew discusses the details of our first quarter results, I’ll provide a few updates on our recent operational and on regulatory developments. With the temperatures in Arizona quickly heating up, we’re focused on executing our robust summer preparedness program with the resource adequacy continuing to be extremely important as energy demands increase and energy supplies in the Southwest tightens. To serve our customers with top-tier reliability, we work year round on operational preparedness, resource planning, procuring sufficient reserve margins, creating customer partnerships to manage peak demand and maintaining a comprehensive fire mitigation program.

In fact, as we head into the wildfire season, the company is taking further action to protect our customers and our communities from the risk of wildfires. Our comprehensive fire mitigation strategy includes three key categories to ensure defense and depth. First, we have a robust vegetation management program, including creating defensible space around poles and infrastructure, and strong coordination with forest management officials around the state. Second, we deploy technology that’s targeted at managing wildfire risk, and that includes weather stations, cameras, remote control, sectionalizing devices and advanced risk modeling software. And third, we apply several risk-informed operating protocols, such as specific requirements for how our crews work safely in fire-prone areas, in addition to new protocols such as Power Safety and Public Safety Power Shutoffs or PSPS.

While PSPS is a new protocol for our program, we’ve been working on this implementation following last summer, and we’ve partnered with local communities first responders and state officials to ensure that our customers are informed and know what to expect. We’ve had community workshops and have invested a lot in customer communications to ensure that this is a transparent process. We’re committed to actively taking steps to prevent wildfires and to safeguard the communities that we serve, while continuing to learn from operating experience developed throughout our industry. Turning to our operational preparedness. It’s extremely important that our generation units are ready for the summer. We’re in the final stages of our planned maintenance activities for our thermal units ahead of the summer period to ensure our system is ready to serve.

In addition, Palo Verde’s Unit 3 is currently in a planned refueling outage that began on April 6, and it’s on schedule to return to service in early May. Upon the successful completion of the latest refueling outage, all three units are poised to provide around the clock clean energy to help meet the demand for the summer for the entire Desert Southwest. I’m also proud to say that we’re starting this year with J.D. Power residential customer satisfaction survey scores that place APS within the first quartile for overall satisfaction when compared to its large investor-owned peers. APS made gains in every category, including power quality and reliability, price, corporate citizenship, billing and payment, communications and customer care, both digital and phone in the first quarter.

Results like this take the dedication and the commitment of all employees across the company, and we look forward to continuing to make improvements for our customers and providing a more frictionless experience. Turning to regulatory. We’ve successfully implemented the rate case outcome on March 8 for our customers. The commission recently voted to hold a narrow rehearing on our rate case that’s limited to the grid access charge, that charge is a rate design issue where the commission had increased the revenue allocation to distributed generation solar customers to better align their rates with cost to service. The commission intends, I think, to further examine whether the grid excess charge is just unreasonable and we’ll be participating in those proceedings.

Additionally, the commission has turned its focus to the regulatory lag docket. The first workshop was held on March 19, with multiple stakeholders presenting a variety of options on how to holistically address regulatory lag and interested parties have been invited to file written comments into the docket and the commission has voiced their intent of having further workshops that will be noticed in the future. We look forward to continuing to work with the commission and with other stakeholders on addressing regulatory lag in Arizona. Although, 2024 is off to a solid start, we know we have much to do still, and we look forward to continuing to execute on our priorities throughout the year. And with that, I’ll turn the call over to Andrew.

Andrew Cooper: Thank you, Jeff and thanks again to everyone for joining us today. This morning, we reported our first quarter 2024 financial results. I will review those results and provide additional details on weather, sales and guidance. In the first quarter of 2024, we achieved earnings of $0.15 per share compared to a loss of $0.03 per share in the first quarter of 2023. This improvement was driven by several key factors: the sale of Bright Canyon Energy, the implementation of new rates on March 8 along with increases in adjusted revenue, and finally robust customer and sales growth. These positive impacts were partially offset by milder year-over-year weather and increases in interest expense depreciation and amortization and L&M.

The Bright Canyon Energy transaction provided a onetime benefit of $0.15 per share this quarter. This follows the initial phase of the sale completed in the third quarter of last year. In addition as Jeff mentioned we successfully implemented new rates for our customers in March and are seeing a benefit from these new revenues. Turning to weather. Although conditions in the first three months of this year were normal, we experienced a drag of $0.07 per share year-over-year. This drag can be attributed to the exceptionally cold start in 2023, which was one of the coldest in the Phoenix Metro area since 1979 and to March 2023 being the coldest March in over three decades. Customer growth for the quarter came in as expected at 1.8% and consistent with our guidance range of 1.5% to 2.5%.

Our weather-normalized sales growth came in at 5.9% for the quarter driven by robust C&I growth. Because first quarter is historically a smaller quarter for the company, we’re still expecting our weather-normalized sales growth to come in within our existing guidance range of 2% to 3% for the year. Arizona’s economy remains a diverse release growth in Investment hub. A prominent example of this vibrant economic activity is Taiwan Semiconductor, which recently announced a $25 billion increase to the previously announced $40 billion investment in Arizona for a total of $65 billion. TSMC announced plans to build a third facility by the end of the decade and the facilities are now expected to employ more than 6,000 workers of which TSMC has already hired over 2,000.

In addition, there continues to be sustained interest for additional data center and manufacturing development within our service territory. Although these developments are outside of our current three-year sales growth guidance they represent significant long-term opportunities for earnings growth and the potential for enhanced cost efficiency for all our customers. Residential growth in our region has been consistently strong. Maricopa County was recognized by the US Census Bureau as the fourth largest growing county in the nation in 2023 welcoming over 30,000 new residents. This ongoing influx of residents underscores the need for continuous investment in our infrastructure to ensure reliable service for all our customers. Our current capital expenditure and financing plans are designed to meet these expanding demands effectively.

O&M was a slight drag compared to Q1 2023. The impact was less than expected primarily due to delays in procuring essential materials needed for planned maintenance work at our power plants. These delays are expected to shift the timing of certain costs from first to second quarter. Despite ongoing inflationary pressures and the costs associated with supporting our expanding customer base, we remain committed to our 2024 O&M guidance which is a year-over-year reduction in core expense. Interest expense was higher this quarter compared to the first quarter of last year driven by increased interest rates and higher debt balances and we continue to monitor the actions of the Federal Reserve. In addition, our depreciation and amortization expense is higher as one of two large planned information technology products went into service this quarter.

These projects are extremely important to make sure we have updated systems and the tools necessary to reliably serve our customers. Due to the shorter depreciation schedule for IT projects, we expect these expenses to create meaningful drag throughout the year and have already accounted for them in our annual guidance. After the constructive wreck case outcome we successfully completed our planned equity offering of about $750 million of common stock and a forward sale. We will determine the most opportune time to settle the forward sale agreements and invest the funds into the utility to maintain a healthy and sustainable capital structure. In addition, the rating agencies have completed their reviews of our ratings and importantly, all three rating agencies have resolved our outlook from negative to stable.

Moody’s and Fitch downgraded Pinnacle West ratings by one notch, with Moody’s downgrading APS ratings one notch as well and we are now similarly rated by all three agencies. We continue to focus on reducing regulatory lag and sustaining our targeted cash flow metrics with adequate cushion to maintain solid investment-grade credit ratings for the benefit of our customers. Finally, we are reaffirming all other guidance provided on the fourth quarter call and look forward to continuing to execute our strategy and reliably serving our customers as we head into the upcoming summer season. This concludes our prepared remarks. I will now turn the call back over to the operator for questions.

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Q&A Session

Operator: Certainly. Everyone at this time, we will be conducting a question-and-answer session. [Operator Instructions] Your first question is coming from Nick Campanella from Barclays. Your line is live.

Unidentified Analyst: Hi. Good morning, team. This is Steve for Nick today and thank you for taking my questions.

Jeff Guldner: Sure. Good morning, Steve.

Unidentified Analyst: Hi. So first I guess on rate case timing as we have more time to dodge as the latest rate case outcome back in February, since the last quarterly update. Can you maybe discuss some of your latest thoughts on SRB capital deployment? And how should it possibly accelerate in the coming years deeper in the plan?

Andrew Cooper: Sure. Thanks for the question. Yes. So we continue to work through our competitive RFP process and that’s really the basis for us putting projects through the SRB. We had a 1000-megawatt RFP in 2023 and we’re negotiating projects that are coming out of that right now. And so there’s a healthy pipeline of projects really across a diverse set of fuels, renewable gas as well, that we’re looking at that would qualify. Our Q4 deck included some illustrative projects that we could meet the criteria for the SRB. And we feel good about those projects being part of the plan certainly at least some of them. And our CapEx for the next three years that you see does include some probability weighted capital on the generation side related to those projects.

Ultimately, the RFPs will determine the results. But the projects that we laid out Q4 represent potentially up to 40-plus percent of the megawatts that we need to procure based on our IRP over the next few years. So there’s a really substantial opportunity there. Of course our number one goal is reliability and cost for customers. But ultimately between this RFP and future RFPs and there will be future RFPs, given the substantial need to meet customer growth demand over the next few years. We’re confident that there’ll be opportunities for us to participate. And then of course with the SRB, the opportunity to substantially reduce the lag on beginning to recover on those investments becomes much shorter. So opportunities ahead, as we have projects that come forward we will certainly update you on the status of them.

Unidentified Analyst: Great. Thanks, Andrew for all the color. That’s really helpful. And maybe I can just turn to financing a little bit as you’ve done the equity deal and remove this financing overhang post the constructive rate outcome. Can you just maybe discuss as we evolve from the last quarter your latest thinking on the remaining clinical capital of $400 million with ATM and hybrid actual disposal has any thinking on this changed since the equity deal also given all the S&P positive revision on the credit outlook how does that affect your thinking and confidence in the even hybrid market?

Andrew Cooper: Sure. As I mentioned earlier, we are really pleased to be able to execute on the foundational discrete block equity that we needed to ensure that we’re maintaining a balanced healthy capital structure down to utility. And so as we go through and you’ve got kind of the three-year capital financing plan in front of you, as we go through the out years of that plan, given the capital needs that we have today and ensuring a balanced capital structure down at the utility, there is as you pointed out an unidentified external financing need of an incremental $400 million from the parent. Over the next couple of years we’ll continue to do the different markets available to us to meet that need. The base case tends to be something like an ATM because that matches up well to deploying capital and then investing the proceeds into the utility.

And so that would sort of be where we would start. But what’s motivating us most of all is maintaining a balanced capital structure down the utility as we look at the capital plan over the next few years being judicious about the amount of parent company debt. And to your point there are security sort of in between debt and common that we will continue to look at as potential opportunities as well. We were really pleased to see all the ratings be returned to stable across all three agencies. The agencies feel comfortable with the amount of holding company debt that we do have but we do want to continue to be judicious about it and make sure that we’re managing to the right cash flow metrics so that we stay in that targeted range of 14% to 16% FFO to debt.

Unidentified Analyst: No, that’s great. Thanks for all the colors. I’ll leave it here. Appreciate it.

Andrew Cooper: Thanks, Steve.

Operator: Thank you. Your next question is coming from Shar Pourreza from Guggenheim Partners. Your line is live.

Unidentified Analyst: Hi, guys. It’s James Ward [ph] on for Shar. How are you.

Andrew Cooper: Hey, good James. How are you?

Unidentified Analyst: Doing well. Thanks. Thanks for taking our questions. I just got a couple for you here. First on sales growth, you’re obviously fortunate to have a fairly diverse mix of industries driving your long-term retail sales growth forecast. Could you remind us how much of the large C&I load that you’re currently seeing is from data centers like in 2024. And then whether you’re expecting the level of contribution to your annual load growth from data centers to increase between now and 2026 and then as well through the rest of the decade.

Andrew Cooper: Sure James, this is Andrew. I’ll start. So in the near term that 5.9% sales growth that we saw for the quarter, we felt really pleased with and it did represent fundamentally a lot of the large high load factor C&I customers. And it was a mix of the ramp-up of the Taiwan semiconductor ecosystem of them and their suppliers and downstream vendors as well as the ramp-up of some of the existing data center customers that we’ve had come online over the last couple of years. In the near term, because Taiwan semiconductor is such a large component of our sales growth, and as you said, the diverse set of industrial and manufacturing customers that were having come in. Their ramp really continues throughout this year until they reach full production next year.